- 43 -
3. Split-Off Did Not Qualify Under Section 355
Section 355 generally allows a corporation to make a tax-free
distribution of an amount of stock constituting control of a
corporation (control being defined in section 355(a)(1)(D)(ii) for
purposes of section 355 by reference to section 368(c))23 to its
shareholders, provided the active business requirement of section
355(b) is satisfied, and the transaction is not deemed a "device" to
make a tax-free distribution of earnings and profits, which otherwise
would be taxable as a dividend. The section 355 regulations impose
other requirements, which we need not address.
Respondent determined that petitioner failed to satisfy several
of the requirements for nonrecognition of gain under section 355 when
it distributed SIC stock to Arnold in redemption of Arnold’s stock in
petitioner. We need consider only whether SIC was actively engaged in
a trade or business immediately after the split-off within the meaning
of section 355(a)(1)(C) and (b)(1)(A), which requires that the
distributing corporation and the subsidiary corporation both be
“engaged immediately after the distribution in the active conduct of a
trade or business”. Sec. 355(b)(1)(A).
The determination of whether a trade or business is actively
engaged in is a factual question requiring an examination of all the
facts and circumstances. Under section 1.355-(1)(c), Income Tax
23 The corporation must also be in control of the
corporation whose stock is being distributed immediately before
the distribution. Sec. 355(a).
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